Aditya Birla Chemicals (India) Ltd - Rs 75.00

Aditya Birla Chemicals Ltd (ABCIL), formly known as Bihar Caustic & Chemicals Limited was incorporated in 1976 as a joint venture between the Aditya Birla Group and the Bihar State Industrial Development Corporation, primarily with the objective of catering to the caustic soda requirements of Hindalco and to contribute towards the economic development of the backward region of Palamau district in Jharkhand. Today, it is among the leading caustic soda producer in the northern and eastern region of the country. Apart from caustic soda it also produces liquid chlorine, hydrochloric acid, sodium hypochlorite, compressed hydrogen and has recently ventured into aluminum chloride. In India, about 45% of the chemical industry depends upon the caustic soda industry as essential inputs for a host of industries like soap and detergent, aluminum, paper & newsprint, fibre, glass, tyre, chemicals & petrochemicals, pharmaceuticals, water treatment, dyes, textiles, oils, etc. However being a subsidiary of Hindalco Industries, ABCIL is having an added advantage of assured off-take of caustic soda by the parent company. It also has a hydrogen bottling facility which provides an additional stream of revenue. ABCIL is a member of several chemicals manufacturers' associations including Alkali Manufacturers Association of India (AMAI), Indian Chemical Council (ICC) and American Chemistry Council.

After shifting the manufacturing process of its plant from mercury technology to the energy efficient state-of-art membrane cell technology, ABCIL has been constantly expanding it capacity albeit at slow pace. Presently it boasts of having an installed capacity of caustic soda (300 TPD), liquid chlorine (250 TPD), hydrochloric acid (125 TPD), sodium hypochlorite (4 TPD) & compressed hydrogen gas (18,25,000 Nm3/A). Secondly, as caustic soda production is power intensive, ABCIL has put up its own 30 MW coal based captive power plant due to which its energy costs are lower than its peers. For value addition and effective utilization of chlorine, the company has commissioned 12,000 TPA aluminium chloride plant in the year 2007 and 17,500 TPA stable bleaching powder (SBP) plant in the year 2008. SBP is marketed under brand name of SHAKTIMAN and is basically used in textile mills for bleaching, sanitation, sewage systems, tanning process, organic synthesis and other applications. On the other hand aluminum chloride is mainly used as an input for manufacturing of aluminum apart from being used in pharmaceuticals, chemical intermediates, agrochemicals, dyestuffs and pigments, hydrocarbon resins, flavors and fragrances. Most importantly, with nearly 70% its production being taken by Hindalco, company has an assured and ready market for its product

Fundamentally, ABCIL is doing quite well as for FY09 it reported 20% growth in sales to Rs 205 cr although the PAT remained flat at Rs 46 cr. During the Sept’08 quarter the boiler of the power plant tripped due to mal functioning of safety device hence the power cost shot up for that period which dented its bottomline for time being. However the problem was rectified in the same quarter and post that company has been churning out good set of nos. Notably, ABCIL enjoys the highest operating margins among it peers - even better than Gujarat Alkalies and Chemfab Alkali. Even for the latest June’09 quarter its topline grew by 15% to Rs 60 cr and PAT improved by 20% to Rs 16 cr. It is one of the few companies which have been consistently reporting an OPM of ~40% and NPM of ~25%. For FY10 it is expected to clock a turnover of Rs 240 cr and PAT of Rs 60 cr leading to an EPS of Rs 26 on equity of Rs 23.40 cr. But despite belonging to such a reputed group and having strong fundamentals like high profit margin, low debt equity ratio, huge reserves, good dividend yield, consistent growth etc, scrip has been always poorly discounted by the marketmen. Currently it is trading at a forward PE multiple of 2.5x times and EV/ EBIDTA of 2x times. There is also a possibility of ABCIL getting merged with Hindalco industries. But if this happens, the true value of ABCIL wont be unlocked, as the merger ratio will more favorable to the parent rather than subsidiary. Still investors are recommended to buy at current levels as scrip can easily double within a year.

Click here to download Report (PDF)